Clausen Gives Views on Banking, California and the U.S. Economy

In the early '70s, "go-go" banking was the name of the game. Stocked with dozens of new Harvard MBAs every year, Citicorp taught the industry that bankers, too, could be aggressive.

But the view from the 40th floor of the Bank of America building in San Francisco gave newly elevated B of A president A.W. Tom Clausen a different perspective. He was in no rush. His bank, still the most profitable in the U.S., was content with slow but steady growth - what some called "go-slow" banking.

Citicorp made it highly visible boss, Walter Wriston, look good with 15 percent to 20 percent growth in the early years of the decade, pushing the New York bank past its West Coast counterpart in earnings in 1972.

But even though it took a few yeas, Clausen's B of A slowly worked its way back to the top, finally announcing last month that its record 1977 earnings of $395 million were a full $14 million higher than Citicorp's.

Friendly, affable and conservative, Tom Clausen exemplifies the style that has made California banking a constant success. prefering the low-key approach in everything from making loans to making public appearences, Clausen, 55, has served a solid eight years on top of a bank that promises to reach $100 billion in assets by 1979 - its 75th anniversary.

In a wide-ranging interview, Clausen last week discussed the philosophy that has brought his bank from humble beginnings in 1904 as a neighborhood trust and savings association with $8,780 in deposits to its present position as the largest bank in the richest society in the world.

QUESTIONS: Contrast the styles of western banking with eastern banking; of Bank of America and Citicorp.

CLAUSEN: I don't think there is any difference in styles. We are a West Coast bank. We are a branch-banking state in California. New York has only had statewide banking for two years now. The western states in general have had statewide banking. California is the great state that it is partially because of branch banking, and I think that the economics of the states would benefit with branch banking.

I think the style and what a bank does is reflective of where it has been, of its origins, of the philosophy of its founder. Certainly Bank of America was dominated by one man - A.P. Glannini - (who) had the dynamic personality to forge branch banking through the State of California.

Q: Is it practical, in the present day and age of electronic funds transfer, to limit banking even to state borders?

A: I'm not going to argue with you. We think that the economy of the United States would be better served if we had interstate banking. One of the reason we were interested in a finance company was to prepare the way for when there is interstate banking. We'll be able to have the machinery in and something set up. (B of A has 372 branches of its finance company, Finance America, spread over 39 states.) It will happen eventually. Markets will be served. Markets must be served.

Q: You have said many times that it is important to decentralize, to delegate power to subordinates. How much power does one of your branch managers, for example, actually have?

A: He can go farther today than he could yesterday, and not as far as he will be able to go tomorrow. As a general practice, the managers in our California division have the authority to handle 98 percent of all the loans that come into their purview - that's a pretty big percentage. I believe very strongly that we are in a service industry and our strength is in our people, and therefore the bank that is the best bank that has the best people.

Q: How do you get the best people?

A: Let them make mistakes. If you tell them every morning what they've got to do, how to do everything and 'here's the bible . . . never vary from it' . . . you're not going to train good people. You're going to have a lot of clerks. We don't want just clerks.

Q: If you had a choice, would your loan portfolio be any different than it is today?

A: I'd like to have fewer loans that are crummy, and more loans that are not crummy.yet, you can't carry that to an extreme. If a bank doesn't have losses, it's not doing its job. Actually, I wouldn't change it much.

Q: Where is the California economy going?

A: The California economy going?

A: The California economy is very strong. The California economy has made greater strides in the last 12 months than the nation as a whole. We have dropped out unemployment. The number of people employed has increased as a percentage more than the national averages, and expandable income is rising. California is a great state.

Q: Why is it a great state?

A: Because it's affluent. We have a climate. We have a spirit. We are a new state.

Q: Where does Governor Jerry Brown fit in. Has he been a good leader as far as the business community is concerned?

A: I think that the governor is going to be hard to beat in the coming election. The governor gets a lot of criticism vis a vis the business community for not the best climate as far as business is concerned. Some say the economy is good in spite of the governor, others say it's because of the governor.

Q: What about confidence in the U.S. economy, and Wall Street?

A: There has been an eroding of confidence. There is an inability to anticipate what the government is going to do. It is the uncertainty that causes eroding confidence in business. We need an energy policy. We need tax reductions to have a stronger growth in our economy. We have a falling dollar. The change in the chairman of the Federal Reserve Bank has had its impact on this, too.

Q: Do you see a change in our economic policies?

A: No, I don't anticipate any fundamental changes. Certainly I hope that we don't get any change in philosophy or direction from the central bank.

Q: What do your economists tell you about the effects of the coal strike?

A: The coal strike is not going to have any great impact in the West. If we can get deliveries of coal back on stream in the next couple of weeks, the impact on the U.S. economy is not going to be all that big.

What we need is to get miners back on the job.

Q: How will the Bank of America be different in 10 years? Where is the bank going?

A: In 1974, we said we were going to slow our growth to a sustainable rate - 10 to 12 percent. We expect to continue to grow at that rate. Of course, all of our pieces will not grow at the same level. The credit card, which has had two great back-to-back years, is continuing strong this year. One of the reasons why our consumer lending - of which the credit card is an important piece - has done as well as it has is that we have been led out of the last recession by the consumer. Retail sales have been very strong. I don't see any signs that the consumer borrowing has topped out.Last year's credit card growth was 40 percent, but I would doubt that it would be up that much this year. We (Bofa) have five million Visa cards and 1.4 million Master Charge cards out.

One of the strengths of the Bank of American Corp. - not style, strength - is the fact that we have this very solid retail base. I refer to it internally as the Rock of Gibralter. It permits us to do things that some other banks don't have the ability to do. We can fund our assets with stable deposits, rather that fund our assents with money market instruments, which are not stable.

We have a huge amount of 5 percent deposits.

Q: What will happen to interest rates?

A: I see interest rates rising slightly in 1978. The pressure is in that direction. Certainly business needs to catch up a little bit with capital expenditures. Tax bills that will be coming out of Congress later this year will address that isse.

Q: What about tax reform - what do you expect?

A: I'm not too optimistic. There might be a small likelihood that the deficit will be bigger because when you're going to propose $35 billion of tax reduction and $9 bilion or $10 billion in tax increases in an election year, which 1978 is, there is going to be a greater tendency to put the reductions in place without the increases because you have to go back and face your constituents.

Q: Some people say the banks helped destroy New York City, in some cases shifting investment to more taxfree areas, for example. As someone who testified before Congress in favor of some form of aid to that city, what do you think?

A: Of course the banks played a role in what happened to New York. You know, redeclining is bad, and greenlining is bad. That's what you're talking about.

Q: What are the prospects for natural gas deregulation? It appears that there may be an administrative softening on that issue.

A: Thank goodness. I think it's going to be good for the economy - the U.S. economy. We need to have a greater incentive for energy discovery in the United States. We also need it as a supportive thing for more conservation. It doesn't make much sense to pay $1.65 maximum here in the U.S. for gas when we're paying $4 plus for LNG coming out of Algeria or Indonesia.

Q: Are we spending enough on energy alternatives?

A: We've got to explore other sources of energy - nuclear, coal, coal gassification, shale, the whole bit. We've financed a housing development using solar energy. We're building a branch In Palm Desert which includes solar energy. We are also financing loans for solar installations through an outside consultant.

Q: Why has your international business been a decreasing percentage of your total business?

A: Thinner margins, greater liquidity, slower economy outside the United States. We're a dollar bank, we're going to emphasis the dollar market. About 42 percent of our assets are outside the confines of the U.S., but because of the narrowing of spreads last year and the year before, it only generated 34 percent of our total earnings.

Q: How concerned are you about the problems of the dollar abroad?

A: The dollar is of concern to the United States and to the central bank. It has to be. Partly because of our big imbalance of trade - last year $30 billion - whereas not too many months earlier it was positive. We had $45 billion of imports in just petroleum, a great chunk of that deficit. If we could slow that growth of dollars going out of the U.S., we could give dollar holders greater confidence. I'm not advocating benign neglect. There are lots of things we can do. The perception, outside, of the U.S. economy is uncertain. There are new players. Bill Miller is a great guy and a strong leader and he is going to do all right, but he is unknown and untested yet.

Q: How is the business press doing?Is the coverage getting better?

A: I think our relationship with the press has been pretty good. I would have to say on balance that there has been a growing sense of awareness by the media about business. It's an educational process. It makes for a better understanding. if the press doesn't understand, how can a reader understand. We think we will come across better talking to the press than not talking to the press.

Q: How long will you stay president of the bank?

A: If I were going be here another 10 years, we would lose a lot of good people. So I don't plan on being here another 10 years. But I don't plan on leaving now. So, that's somewhere between now and when I turn 65.

Q: Are you grooming a replacement?

A: We are blessed with a lot of good people in the bank and the corporation. There is room for them all. We are a team.

Q: Do you send enough time with your family?

A: Probably not, but that's one of the trade-offs. I'm happily married. My wife is a team player. We all make sacrifices. I have two sons in universities. Neither will go into banking, that I know of. One is going to graduate this year in pre-med. The other is an all-round boy who is majoring in girls.